Exam 3: Accrual Accounting

Which statement is correct about expenses in the income statement?

Sing Songs Ltd.started operations on January 1,2016.During its first year of operations,the company had a choice of accounting policies: Assume that the company selected Accounting Option 2.Using the following information about activities for 2016-2018,derive the net income for each year:

Changes in accounting estimates are based on

Which financial statement provides information about the transactions in a company's financing,investing,and operating cycle?

The Rihanna Company owns 1,000 shares in Abhay Corp,a public company listed on the stock exchange.The share price was as follows: - At date of purchase,July 2,2018 = $100/share - At year end,June 30,2019 = $100/share - At start of next fiscal year,July 1,2019 = $95/share - At date financial statements authorized for issue,September 1,2019 = $90/share Materiality for the Rihanna's financial statements is $500,000.What is the appropriate treatment of the subsequent event in the June 30,2019 financial statements?

Explain the difference between a cash cycle,a financing cash cycle,an investing cash cycle and an operating cash cycle.

What is a "cash" cycle?

Identify whether each of the following items of operating expense is described according to its nature.

Why are excessive accruals a concern for accounting and financial reporting?

The method of depreciation was changed from the double-declining-balance method to the straight-line method in fiscal 2019.A machine was purchased on January 1,2017 at a cost of $150,000.The machine has an estimated useful life of 10 years and a residual value of $9,000.What should have been booked as depreciation expense in fiscal 2018?

Which of the following is not an example of a "cash" cycle?

Computer Consulting Limited was started in early 2016 and continued to operate until early 2019,when it was wound up due to disputes between the two principal shareholders.When it started,the company used these accounting policies: 1.Use straight-line depreciation for the firm's only asset,a computer which cost $1,100,000 and has an estimated useful life of four years. 2.Estimate warranty expense as 9% of sales. 3.Estimate bad debts expense as 5% of sales. Derive the annual net cash flows for 2016 to 2018.For the year-end balance for 2019,assume accounts receivable,allowance for doubtful accounts,and the warranty accrual are $0,as the firm wound itself up during the year and all timing differences have been resolved.

A change in accounting policy

Which of the following would result in an overstatement in reported net income?

The following event occurred after the company's year-end but before the completion of the audit.For this subsequent event,determine whether the event: • requires an adjustment to the year-end financial statements, • requires note disclosure,or • requires neither adjustment to recognized amounts nor disclosure. New technology makes a major capital asset redundant or causes it to lose significant fair market and salvage value.(Justify your recommendation).

Sing Songs Ltd.started operations on January 1,2016.During its first year of operations,the company had a choice of accounting policies: Using the following information about activities for 2016-2018,derive the 2016 net income (only)under both accounting options and explain why the net income under the two methods is not the same.

Hatcher Limited,a private company,was started on January 1,2017.For the first year,the chief accountant prepared the financial statements and a local accountant completed the necessary review of these statements.However,for the year ended December 31,2018,an external auditor was appointed.For each situation below,explain the recommended treatment for each of these matters in terms of whether they are errors,changes in accounting policy,or changes in estimate.Explain your conclusion. 1) Long-term contracts: Hatcher used the completed contract method for revenue recognition in 2017. Management now believes that the percentage of completion method would be better. Income under the completed contract method for 2017 was $3,800,000 and for 2018 it was $3,600,000. If the percentage of completion method had been used, the income would have been $5,800,000 (2017) and $3,400,000 (2018). 2) Accounts receivable: The accounts receivable on December 31, 2017, included a $30,000 account which was not provided for but subsequently was written off during 2018 as the customer went bankrupt after the issuance of the financial statements. Hatcher would like to adjust 2017 for this oversight as it sees this as an error. 3) Machine depreciation: Hatcher has a machine that cost $500,000 and has been depreciated over an estimated useful life of 10 years. Upon reviewing the manufacturer's reports in 2018, management now firmly believes the machine will last a total of 15 years from date of purchase. They would like to change last year's depreciation charge based on this analysis. Depreciation expense of $50,000 has been recorded for 2018. 4) Building depreciation: The company's building (cost $5,000,000, estimated salvage value $0, useful life 20 years) was depreciated last year using the 10% declining-balance method. The company and auditor now agree that the straight-line method would be a more appropriate method to use. A depreciation provision of $450,000 has been made for 2018. 5) Inventories: The accountant last year failed to apply the lower of cost or net realizable value to ending inventory. Upon review, the inventory balance for last year should have been reduced by $250,000. The closing inventory allowance for this year-end should be $370,000. No entry has been made for this. 6) Warranties: Hatcher does not accrue for warranties; rather it records the warranty expense when claims are paid. Hatcher provides a one-year warranty for defective goods. Payments to satisfy warranty claims in 2017 were $160,000, and $370,000 in 2018. Out of the $370,000 paid in 2018, $170,000 related to 2017 sales. A reasonable estimate of warranties payable at the end of 2018 is $270,000.

The following event occurred after the company's year-end but before the completion of the audit.For this subsequent event,determine whether the event: • requires an adjustment to the year-end financial statements, • requires note disclosure,or • requires neither adjustment to recognized amounts nor disclosure. A new competitor enters the marketplace,which will result in serious price competition and,likely,reduced income next year.(Justify your recommendation. )

Which statement is correct about accrual accounting?

A company's reported earnings are $1,000 and cash flows are $600.Based on economic conditions during the year,the company booked allowances of $250.As a result of contractual incentives,the company booked a further $150 in accruals.What is the total of the unbiased accruals and excessive accruals?